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Keeping the dangers of credit in mind while shopping

Published: Thursday, December 10, 2009

Updated: Monday, January 18, 2010

Ah, the holidays! It’s a time for family, food, religious observances and a nightmarish scene at many shopping centers. This is most evident after Thanksgiving. After this Thanksgiving, sales were modestly higher than last year.

With such high rates of spending ($10.66 billion, according to the Associated Press), it can be assumed that many people used credit cards to take advantage of some of the lowest prices offered during the year. In addition to the annual shopping, think about the money spent on purchases related to food costs, movie tickets, and travel expenses, and it becomes clear that as a nation, we spent a “chunk of change.”

Our society could not operate in this manner if it were not for the almighty credit card. It sounds so easy doesn’t it? You fill out a short application, your credit is evaluated to determine how much of a risk you are, and suddenly, you receive an envelope with a letter congratulating you on a smart financial decision. Attached to this letter, via rubbery bands of adhesive, is a new shiny piece of plastic.

In May, Congress passed a bill that placed new restrictions on credit card companies with the goal of helping the consumers better understand risks and to provide a leg up when it comes to paying off credit cards faster. Whether this was truly achieved may be debated, but that is a broad overview of the goals of that legislation.

There are many things to consider when using a credit card. There’s the interest rate. Perhaps it’s a really good deal and under 10 percent. The recent law passed increased the amount of time a credit card company must provide warning of an impending increase in this rate. It does not prevent or otherwise slow down the rate of increase. If a payment is missed on your credit card, it is not uncommon to see the interest rate skyrocket from 10 to 25 percent or even higher. Missing a payment can also cause your credit score to go down. Your credit score is something we always hear about in catchy jingles on TV, but what is it? Who keeps track? What is a good score? Furthermore, why does it matter? There are three companies that use five pieces of information to track your credit rating.

Experian, Transunion, and Equifax are the names of the primary companies banks and loan providers (including credit card companies) use to determine how much of a risk they are taking by doing business with you.

The pieces of information used to determine your credit score include: the length of your credit history (the longer the better), whether you regularly make at least the minimum payment, and the ratio of your outstanding balance with regard to your spending limit. A good score is 650 and above. A great score is generally anything above 750.

The higher your score, the more likely you will be able to obtain a loan. In addition, great credit scores earn you much lower interest rates on loans for your car, your eventual mortgage, and of course, credit cards.

If you don’t have credit (i.e. you have never obtained a loan or credit and pay cash or debit for everything), it may be a good idea to get a general credit card. This is not even for emergencies, but simply to make small, manageable purchases that will be paid off at the end of every month.

This helps you develop your history. But please, be careful. Pay it off on time, every time. If you do this and pay the balance in full every month, you won’t even have to worry about being charged interest, much less whether the rate will increase.

If you have already amassed more debt than you believe you can handle, pay more than the minimum payment. It also may be a good time to consult a debt counselor before it gets too out of hand.

As we gather with family and friends for the holidays, focus on what is truly important. It is the thought that counts, and not how much a gift costs. There are many alternatives to buying expensive and lavish gifts, such as volunteering at a soup kitchen or a shelter, or giving a donation to your favorite charity in honor of a loved one. This will help you and others in need.

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